519 keisler dr., caiy, nc 27511 - bisnisfx yourself technique 2 - optimal f and the kelly criterion...

SPECIAL REPORT ON MONEY MANAGEMENT

Copyright 0 1997 by I.I.T.M., Inc.

All rights reserved.

No part of this publication may be reproduced, stored in a retrievalsystem, or transmitted, in any form or by any means, electronic,mechanical, photocopying, recording, or othemise, without priorwritten permission. For information:

International Institute of Trading Mastery, Inc.519 Keisler Dr., Ste 204,Caiy, NC 27511(919) 852.3994(9 19) 852-3942Internet http://wwwiitm.com

This publication is designed to provide accurate and authoritativeinformation in regard to the subject matter covered. It is sold withthe understanding that the publisher is not engaged in renderinglegal, accounting, or other professional setvice. If legal advise orother expert assistance is required, the services of a competentprofessional person should be sought.

From a Declaration of Principles jointly adopted by a Committee ofthe American Bar Association anda Committee of Publishers.

Printed in the United States of America

Contents

Contents

Forward

Managing Other People’s Money

Money Management Defined

Money Management Models

Model 1 - Units per Fixed Amount of Money

Model 2 - Equal Units /Equal Leverage Model

Model 3 - Percent of Margin

Model 4 - Percent Volatility

Model 5 - Percent Risk

Model 6 - Periodic Money Management Adjustments

Model 7 - Group Control

Model 8 - Portfolio Heat

Model 9 - Long versus Short Positions

Designing a High Reward-Risk System for ManagingMoney

How to Produce Maximum Profits

Technique 1 -Get Best Reward-to-Risk Ratio and thenLeverage Yourself

Technique 2 - Optimal f and the Kelly Criterion

Technique 3 -Playing the “Markets Money” .Technique 4 - Creative Money Management with theMarket’s Money

Conclusion

Other Suggested Courses by Dr. Van Tharp

Special Report on Money Mangement

Forward

P erhaps the greatest secret to top trading and investing

success is appropriate money management. I call it a

“secret” because few people seem to understand it,

I including many people who’ve written books on the topic.

Some people call it risk control, others call it

diversification, and still others call it how to “wisely” invest your money.

However, the money management that is the key to top trading and

investing simply refers to the algorithm that tells you “how much” with

respect to any particular position in the market.

There are many psychological biases that keep people from

practicing sound money management. In addition, there are also

practical considerations, such as not understanding money

management or not having sufficient funds to practice sound money

management.

I’ve written this special report to give you an overall understanding

of the topic and show you various models of money management.

Enjoy the journey its potentially the most profitable journey you will

ever take. The material is quite complex, despite an attempt to make it

simple. However, you’ll find it well worth your while to go through all

the examples until you have mastered it

Van K. Tharp, Ph.D.

Van K. Tharp, Ph.D. I

COURSE UPDATEYOUR PERFORMANCE TRADING EDGE

1

Special Report onMoney Management - Part I

J ohn was a little shellshocked over what had happened in themarket over the last three days - he’d lost 70% of his accountvalue. He was shaken, but still convinced that he could make

the money back! After all, he had been up almost 200% before themarket withered him down, He still had $4,500 left in his account.What advice would you give John?

Your advice should be, “get out of the market immediately. Youdon’t have enough money to trade speculatively.” However, theaverage person is usually trying to make a big killing in the market,thinking that he or she can turn a $5,000 to $10,000 account into amillion dollars in less than a year. While this sort of feat is possible,the chances of ruin for anyone who attempts it is almost certain.

Ralph Vince did an experiment with forty Ph.D.s. He ruled outdoctorates with a background in statistics or trading. All others werequalified. The forty doctorates were given a computer game to trade.They started with $10,000 and were given a 100 trials in a game in

Page 1


which they would win 60% of the time. When they won, they won the

amount of money they risked in that trial. When they lost, they lost the

amount of money they risked for that trial.

This is a much better game than you’ll ever find in Las Vegas. Yet

guess how many of the Ph.D’s had made money at the end of 100

trials? When the results were tabulated, only two of them made

money. The other 38 lost money. Imagine that! 95% of them lostmoney playing a game in which the odds of winning were betterthan any game in Las Vegas. Why? The reason they lost was their

adoption of the gambler’s fallacy and the resulting poor money

management.

Lets say you started the game risking $1,000. In fact, you do that

three times in a row and you lose all three times - a distinct possibility

in this game. Now you are down to $7,000 and you think, “I’ve had

three losses in a row, so I’m really due to win now.” That’s the

gambler’s fallacy because your chances of winning are still just 60%.

Anyway, you decide to bet $3,000 because you are so sure you willwin. However, you again lose and now you only have $4,000. Your

chances of making money in the game are slim now, because you

must make 150% just to break even. Although the chances of four

consecutive losses are slim - .0256 - it still is quite likely to occur in

a 100 trial game.

Here’s another way they could have gone broke. Lets say they

started out betting $2,500. They have three losses in a row and are

now down to $2,500. They now must make 300% just to get back to

even and they probably won’t be able do that before they go broke.

In either case, the failure to profit in this easy game occurred

because the person risked too much money. The excessive risk

occurred for psychological reasons - greed, the failure to understandthe odds, and, in some cases, even the desire to fail. However,

Page 2


mathematically their losses occurred because they were risking toomuch money.

What typically happens is that the average person comes into

most speculative markets with too little money. An account under

$50,000 is small, but the average account is only $5,000 to $10,000.

As a result, these people are practicing poor money management just

because their account is too small. Their mathematical odds of failure

are verv hiah just because of their account size.

- - . . - - . . -

5 PercentI --.-- -- ~---

5.3% Gain10 PE !rr,ent 11.1% Gain

15cent 17.6% Gain

l mr

t 90 Percent 900% Gain I

Table 1 - Recovery after Drawdowns

Look at Table 1. Notice how much your account has to recover

from various sized drawdowns in order to get back to even. For

example, losses as large as 20% don’t require that much of a

corresponding gain to get back to even. But a 40% drawdown requires

a 66.7% gain to breakeven and a 50% drawdown requires a 100%

gain. Losses beyond 50% require huge, improbable gains in order to

get back to even. As a result, when you risk too much and lose, your

chances of a full recovery are very slim.

Special Repoti on Money Mangement

Managing Other People’s Money

I n the futures industry, when an account goes down in value, it’s

called a drawdown. Suppose you open an account for $50,000 on

August 1~7’~. For a month and a half, the account goes straight up.

On September 30th, it closes at a high of $80,000 for a gain of 60%. At

this point, you may still be in all of the same trading positions. But as a

professional, your account is “marked to the market” at the end of the

month and statements go out to your clients indicating what their

respective accounts are worth.

Now, let’s say that your positions start to go down in value around

the 6’h of October. You close them out around the 14’h of October and

your account is now worth about $60,000. Let’s say, for the sake of

discussion, that your account at the end of October is worth $60,000.

Essentially, you’ve had a peak-to-trough drawdown (peak = $80,000,

trough = $60,000) of $20,000 or 25%. This may have occurred despite

the fact that all of your trades were winners. It doesn’t really matter as

far as clients are concerned. They still believe that you just lost

$20,000 (or 25%) of their money.

Let’s say that you now make some losing trades. Winners and

losers, in fact, come and go so that by August 30th of the following

year, the account is now worth $52,000. It has never gone above

$80,000, the previous peak. Thus, you now have a peak-to-trough

drawdown of $28,000 - or 35%. As far as the industry is concerned,

you have an annual rate of return of 4% (i.e., the account is only up by

$2,000) and you are labeled as having a 35% peak-to-trough

drawdown. And the ironic thing is that most of the drawdown occurred

at a time in which you didn’t have a losing trade - you just managed

to give back some of your profits. Nevertheless, you are still

Page 4


considered to be a terrible money manager. Money managers

typically have to wear the label of the worst “peak-to-trough“ drawdown

that they produce for their clients for the rest of their lives.

Think about it from the clients viewpoint - you watched $28,000

of your money disappear, To you its a real loss. You could have

asked for your money on the first of October and been $28,000 richer.

Trading performance, as a result, is best measured by one’s

reward-to-risk ratio. The reward is usually the compounded annual

rate of return, In our example, it was 4% for the first year. The risk is

considered to be the peak-to-trough drawdown which in our example

was 35%. Thus, this traders reward-to-risk ratio was 4/35 or 0.114 - a

terrible ratio.

Typically, you want to see ratios of 2 or better in a money

manager. For example, if you had put $50,000 in the account and

watched it rise to $58,000, you would have an annual rate of return of

16%. Let’s say that when your account reached 553,000, it had

drawdown to $52,000 and then went straight up to $58,000. That

means that your peak-to-trough drawdown was only 0.0189 (i.e.,

$1,000 drawdown divided by the peak equity of $53,000). Thus, the

reward-to-risk ratio would have been a very respectable 8.5. People

would flock to give you money with that kind of ratio.

Let’s take another viewpoint and assume that the $50,000 account

is your own. How would you feel about your performance in the two

scenarios? In the first scenario you made $2,000 and gave back

528,000. In the second scenario, you made $7,000 and only gave

back $1,000.

Lets say that you are not interested in 16% gains. You want 40-

50% gains. In the first scenario you had a 60% gain in a month and ahalf. You think you can do that several times at year. And you’re

Page 5


willing to take the chance of giving all or most of it back in order to to

that. You wouldn’t make a very good money manager, but you might

be able to grow your own account at the fastest possible rate of return

if you could “stomach” the drawdowns.

Both winning scenarios, plus numerous losing scenarios, are

possible using the same trading system. You could aim for the highest

reward-to-risk ratio. You could aim for the highest return. Or you could

be very wild, like the Ph.D.‘s in the Ralph Vince game and lose much

of your money by risking too much on any given trade.

Interestingly enough, a research study (Brinson, Singer, and

Beebower, 1991) has shown that money management (called asset

allocation in this case) explained 91.5% of the returns earned by 82

large pension plans over a ten year period. The study also showed

that investment decisions by the plan sponsors pertaining to both the

selection of investments and their timing, accounted for less than 10%

of the returns. The obvious conclusion is that money management is acrifical factor in trading and invesfment decision making.

You now understand the importance of money management. Letsnow look at various money management models, so that you can see

how money management works. Many of the examples given are in

the futures market. However, the models apply equally well to any

investment. When the example says contract or unit or 100 shares,

the meaning, for all practical purposes, is the same.

Page 6


Money Management Defined

I n my opinion, money management is the most significant part of

any trading system. Many professionals, and most amateurs, do

not understand how important it is. In fact, I recently attended a

seminar for stock brokers that detailed a particular method of investing

that they could use to help their clients. While the seminar as a whole

was terrific, the topic of money management, as I’ve defined it here,

was not even covered. One speaker did talk about money

management, but I could not fit what he was talking about into this

discussion at all. At the end of ,his talk, I asked him, “What do you

mean by money management?” His response was, “That’s a very

good question. I think it’s how one makes trading decisions.”

Since money management is the difference between poor

performance and great performance - the difference between going

broke and being a successful professional - it’s important that I

define it right now. Please take note.

Money management is that portion of your tradingsystem that tells you “how many” or “how much.”How many units of your investment should you put

on at a given time? How much risk should you bewilling to take? Aside f rom your personalpsychological issues, this is the most critical conceptyou need to tackle as a trader or investor.

The concept is critical because the question of “how much”

determines your loss potential and your profit potential. In addition,

you need to spread your opportunity around into a number of different

Page 7


investments or products. Equalizing your exposure over the various

trades or investments in your portfolio gives each one an equal chance

of making you money.

I was intrigued when I read Jack Schwager’s Market Wizards in

which he interviews some of the world’s top traders and investors.Practically all of them talked about the importance of money

management. Here are a few sample quotes:

“Risk management is the most important thing to be well

understood. Undertrade, undertrade, undertrade is my secondpiece of advice. Whatever you think your position ought to be,cut it at least in half” - Bruce Kovner

“Never risk more than 1% of your total equity in any onetrade. By risking I %, I am indifferent to any individual trade.

Keeping your risk small and constant is absolutely critical. ”- Lamy Hite

“You have to minimize your losses and tv to preserve capitalfor those very few instances where you can make a lot in a veryshorr period of time. what you can’t afford to do is throw

away your capital on suboptimal trades. ” - Richard Dennis

Professional gamblers play low expectancy, or even negative

expectancy, games. They simply use skill and/or knowledge to get a

slight edge. These people understand very clearly that money

management is the key to their success. Money management for

gamblers tends to fall into two types of systems - martingale and anti-

martingale systems.

Martingale systems increase winnings during a losing streak. For

example, suppose you were playing red and black at the roulette

wheel. Here you are paid a dollar for every dollar you risk, but your

Page 8


odds of winning are less than 50% on each trial. However, with the

martingale system you think you have a chance of making money

through money management. The assumption is that after a string of

losses you will eventually win. And the assumption is true - you will

win eventually. Consequently, you start with a bet of one dollar and

double the bet after every loss. When the ball falls on the color you

bet, you will make a dollar frbm the entire sequence of wagers.

The logic is sound. Eventually, you will win and make a dollar. But

two factors work against you when you use a martingale system. First,

long losing streaks are possible, especially since the odds are less

than 50% in your favor. For example, one is likely to have a streak of

10 losses in a row in a 1,000 trials. In fact, a streak of 15 or 16 losses

in a row is quite probable. By the time you have reached ten in a row,

you would be betting $2,048 in order to come out a dollar ahead. If you

lose on the eleventh throw, you would have lost $4,095. Your reward-

to-risk ratio is now 1 to 4095.

Second, the casinos place betting limits. At a table where the

minimum bet was a dollar, they would never allow you to bet much

over $50 or $100. As a result, martingale betting systems, where you

risk more when you lose, just do not work.

Antimartingale systems, where you increase your risk whenyou win, do work. Smart gamblers know to increase their bets, within

certain limits, when they are winning. And the same is true for trading

or investing. Money management systems that work call for you to

increase your position size when you make money. That holds for

gambling and for trading and for investing.

The purpose of money management is to tell you how many units

(shares or contracts) you are going to put on, given the size of your

account. For example, a money management decision might bethat you don’t have enough money to put on any positions

Page 9


because the risk is too big. It allows you to determine your reward

and risk characteristics by determining how many units you risk on a

given trade and in each trade in a portfolio. It also helps you equalize

your trade exposure in the elements in your portfolio.

Some people believe that they are “managing their money” by

having a “money management stop.” Such a stop would be one in

which you get out of your position when you lose a predetermined

amount of money - say $1000. However, this kind of stop does not

tell you “‘how much” or ‘how many,” so it really has nothing to do withmoney management. Controlling risk by determining the amount of

loss if you are stopped out is not the same as controlling risk through a

money management model that determines the size of your position.

There are numerous money management strategies that you can

use. In the remainder of this update, you’ll learn different money

management strategies that work well. Some are probably much more

suited to your style of trading or investing than others. Some work best

with stock accounts, while others are designed for a futures account.

All of them are anti-martingale strategies in that your position sizegoes up as your account size grows.

The material is somewhat complex. However, I’ve avoided the use

of difficult mathematical expressions and given clear examples of each

strategy. As a result, you simply need to read the material carefully

and go over it until you understand it.

Page 10


Money Management Models

AII of the models you’ll learn about in this report relate to theamount of equity in your account. These models cansuddenlv become much more complicated when YOU realize

that there are three methods of determininq equity. Each method canhave a different impact upon your exposure in the market and on yourreturns. These methods include the core equity method, the totalequity method, and the reduced total equity method.

The Core Equity Method is simple. When you open a newposition, you simply determine how much you would allocate to thatposition according to your money management method. Thus, if youhad four open positions, your core equity would be your starting equityless the amount allocated for each of the open positions.

Let’s assume you start with an account of $50,000 and youallocate 10% per trade. You open a position with $5,000 moneymanagement allocation, using one of the methods described below.You now have a core equity of $45,000. You open another positionwith a $4,500 money management allocation, so you have a coreequity of $40,500. You open a third position with an allocation of$4,050, so that your core equity is now $36,450. Thus, you have acore equity position of $36,450 plus three open positions. In otherwords, the core equity method subtracts the initial allocation ofeach position and then makes adjustments when you close thatposition out. New positions are always allocated as a function of yourcurrent core equity.

The Total Equity Method is also very simple. The value of youraccount equity is determined by the amount of cash in your account

Page 11


plus the value of any open positions. For example, suppose you have

$40,000 in cash plus one open position with a value of $15,000, one

open position worth $7,000, and a third open position that has a loss

of $2,000. Your total equity is the sum of the value of your cash

plus the value all of your open positions. Thus, your total equity is

$60,000.

The Reduced Total Equity Method is a combination of the two

methods above. It is like the core equity method in that the exposure

allocated when you open a position is subtracted from the starting

equity. However, it is different in that you also add back in any profit or

reduced risk that you would receive when you move a stop in your

favor. Thus, your reduced total equity is your core equity plus theprofit of any open positions that are locked in with a stop or thereduction in risk that occurs when you raise your stop. (Note: This

is sometimes called the Reduced Core Equity Method. However, that

title doesn’t make any sense to me, so I’ve renamed it to one that

does.)

Here’s how that works. Suppose you have a $50,000 account.

You open a position with a $5,000 money management allocation.

Thus, your core equity (and reduced total equity) is now $45,000. Now

suppose the underlying commodity moves up in value and you have a

trailing stop. Today, you only have $3,000 in risk locked because of

your new stop. As a result, your reduced total equity today is $50,000

less your new risk exposure, or $47,000.

The next day, the value drops by $1,000. Your reduced total

equity is still $47,000 since the risk to which you are exposed if you get

stopped out is still $47,000. It only changes when your stop changes

to reduce your risk, lock in more profit, or close out a position.

Page 12


You now buy a second position, with a $4,000 moneymanagement allocation. The value of the first position moves up andyou now lock in $11,000 worth of profit by moving up your stop. Yourreduced total equity is now $50,000 minus the initial allocation of yoursecond position ($4,000) plus the locked in profit of $11,000 on thefirst position. The resulting new value is $57,000.

The models below all size positions according to your equity.Thus, each model of calculating equity will lead to differentposition sizing calculations. Generally, I’ll refer to the total equitymethod of calculating equity unless otherwise stated in the discussionsof each of the models that follow.

Page 13

Special Repori on Money Mangemenr

Model 1 - Units per Fixed Amount of Money

B asicaliy, this method tells you “how much” by determining that

you will trade one unit for every X dollars you have in your

account. For example, you might trade one contract per

$50,000 of your total equity.

When you started trading or investing, you probably never heard

about money management. If you knew something about it, your

knowledge probably came from some book by an author who didn’t

understand it either. Most books that discuss money management are

about diversification or about optimizing the gain from your trading.

Books on systems development or technical analysis don’t even begin

to discuss money management adequately. As a result, most tradersand investors have no place to go to learn what is probably the mostimportant aspect of their craft.

Thus, armed with your ignorance, you open an account with

$20,000 and decide to trade one contract of everything in which you

get a signal to trade (an investor might just trade 100 shares). Later, if

you’re fortunate and your account moves to $40,000, you decide to

move up to two contracts (or 200 shares) of everything. As a result,

most traders who do practice some form of money management use

this model. It is simple. It tells you “how much” in a straight-forward

way.

The one unit per fixed amount of money has one advantage in that

you never reject a trade because it is too risky. Let me give you an

example of a recent experience of two CTAs I know. One trades one

contract per $50,000 in equity, while the other limits his risk to 3% of

equity and won’t open a position in which his exposure is more than

Page 14


that. Recently, each was presented with an opportunity to trade the

Japanese Yen contract. The person trading one contract, no matter

what, took the trade. The subsequent move in the Yen was

tremendous, so this person was able to produce the biggest monthly

gain that his firm had ever experienced in their history - a monthly

20% gain.

On the other hand, the other trader couldn’t take the trade, even

though his account size was $100,000, because the risk involved if the

trade went against him exceeded his 3% limit. The second trader

didn’t have a profitable month.

Of course, this also works in reverse. The first trader could have

taken a large loss if the Yen trade had gone against him which the

other trader would have avoided.

In presenting the results of all these systems, I’ve elected to use a

single trading system, trading the same commodities over the same

time period. The system is a 55day channel breakout system. In

other words, it enters the market on a stop order if the market makes a

new E&day high (long) or 55day low (short). The stop, for both the

initial risk and profit taking, is a 21-day trailing stop on the other side of

the market.

To illustrate, if you go long and the market hits a 21-day low, you

exit. If you are short and the market makes a new 21-day high, you

exit, This stop is recalculated each day, and it is always moved in your

favor so as to reduce risk or increase your profits. Such breakout

systems produce above average profits when traded with sufficient

m o n e y .

This system was tested with a million dollars in start-up equity with

a basket of 10 commodities in the years 1981 through 1991.

Whenever data are presented in this report, it is based upon this same

Page 15

Special Report OR Money Mangement

55/21-day breakout system tested over the same commodities overthe same years. The only difference between the tables is the moneymanagement model used. Table 2 shows the results with this systemusing the first money management model.

$ X in equity Profits Trades % Gain Calls Drawdown$100,000 $5034,533 0 18.20% 0 36.86%

890.000 56.207208 0 20.20% 0 40.23%I sxl0.000 1 $7.725.361 1 0 I 22.30% 0 43.93%

I §.70~000 1 S10.078.968 1 0 I 25.00% I 0 48.60% 1I $60,000 1 $13.539,570 0 / 28.20% 1 0 ) 54.19%

0 ( 61.04%

Table 2:55121 Day Breakout System with 1 contract per $X in equity

(Starting Equity is One Million Dollars)

Notice that the system breaks down at one contract per $20,000 inequity. At $30,000, you’d have to endure an 80% drawdown and you’dhave to have at least $70,000 if you wanted to avoid a 50% drawdown.

To really evaluate this money management method, you’ll have tocompare it with the tables developed from the other models (seeTables 3 and 5).

Despite its advantage of allowing you to always take a position, Ibelieve that the one unit per fixed dollars type of money managementis limited, because 1) all investments are not alike and 2) it does notallow you increase your exposure very rapidly with small amounts ofmoney. In fact, with a small account, the “units per fixed amountmodel” amounts to minimal money management. Lets explore both ofthese reasons.

Page16

Speck/ Report on Money Mangement

All contracts are not alike. Suppose you are a futures trader andyou decide you are going to be trading up to twenty differentcommodities with your $50,000. Your basic money managementstrategy is to trade one contract of anything in that portfolio that givesyou a signal. Lets say you get a signal for both bonds and corn. Thus,your money management says you can buy one corn contract and onebond contract.

With T-bonds futures at $112 as of August 1995, you arecontrolling $112,000 worth of product. In addition, the daily range (i.e.,the volatility) is about 0.775 so if the market moved three times thatamount in one direction, you would make or lose $2,325. In contrast,with the corn contract you are controlling about $15,000 worth ofproduct. If it moved three daily ranges with you or against you, yourgain or loss would be about $550. Thus, what happens with yourportfolio will depend about 80% on what bonds do and only about 20%on what corn does.

One might argue that corn has been much more volatile andexpensive in the past. That could happen again. But you need todiversify your opportunity according to what’s happening in the marketright now. Right now, based on the data presented, corn has about20% of the impact on your account that bonds would have.

Cannot increase exposure rapidly. The purpose of anantimaringale strategy is to increase your exposure when you arewinning. When you are trading one contract per $50,000 and you onlyhave $50,000, you will have to double your equity before you canincrease your contract size. As a result, this is not a very efficient wayto increase exposure during a winning streak. In fact, for a 550,000account it almost amounts to no money management.

Part of the solution would be to require a minimum account size ofa million dollars. If you did that, your account would only have to

Page 17


increase by 5% before you moved from 20 contracts (1 per $50,000) to21 contracts.

One reason to have money management is to have equalopportunity and equal exposure across all of the elements in one’sportfolio. You want an equal opportunity to make money from eachelement of your portfolio. In addition, you also want to spread your riskequally among the elements of your portfolio.

Having equal opportunity and exposure to risk, of course, makesthe assumption that each trade is equally likely to be profitable whenyou enter into it. You might have some way to determine that sometrades are going to be more profitable than others. If so, then youwould want a money management plan that gives you more units onthe higher-probability-of-success trades - perhaps a discretionarymoney-management plan. However, for the rest of this update, we’regoing to assume that all trades in a portfolio have an equalopportunity of success from the start. That’s why you selected them.

The “units per fixed amount of money” model, in my opinion,doesn’t give you equal opportunity or exposure. But there are anumber of methods whereby you can equalize the elements of yourportfolio. These include equating 1) the total value of each element ofthe portfolio; 2) the margin of each element in the portfolio; 3) theamount of volatility of each element in the portfolio; and 4) the amountof risk (i.e., how much you’d would lose when you got out of a positionin order to preserve capital) of each element in the potiolio.

Page 18


Model 2 - Equal Units /Equal Leverage Model

The Equal Units Model is typically used with stocks or other

instruments which are not leveraged. The model says that

you determine “how much” by dividing your capital up into five

or ten equal units. Each unit would then dictate how much product you

could buy. For example, with our $50,000 capital, we might have five

units of $tO,OOO each.

Thus, you’d buy $10,000 worth of investment “A”, $10,000 worth of

investment “B”, $10,000 worth of investment “C” and so forth. You

might end up buying 100 shares of a $100 stock, 200 shares of a $50

stock, 500 shares of a $20 stock, 1000 shares of a $10 stock, and

1429 shares of a $7 stock. Part of the money management in this

strategy would be to determine how much of your portfolio you might

allocate to cash at any given time.

$745%

Chart 1: Distribution of Funds as Shares(each unit represents $10,000)

Chart 1 simply illustrates the number of shares, as a percentage of

total shares, for each of the five $10,000 units.

Page 19


Notice that there is some inconvenience in this procedure. For

example, the price of the stock may not necessarily divide evenly into

$10,000 - much less into 100 share units.

In futures, the equal units model might be used to determine how

much value you are willing to control with each contract. For example,

with the $50,000 account you might decide that you are willing to

control up to $250,000 worth of product. And lets say you arbitrarily

decide to divide that into five units of $50,000 of each.

A bond contract is currently worth about $112,000. You couldn’t

buy any bonds, using this money management criterion, because

you’d be controlling more product than you can handle with one unit.

Corn is traded in units of 5,000 bushels. A corn contract, with corn

at $3 per bushel, is valued at about $15,000. Thus, your $50,000

would allow you to buy 3 units of corn or $45,000 worth.

Gold is traded in 100 ounce contracts in New York, which at a

price of $390 per ounce, gives a single contract a value of $39,000.

Thus, you could trade one gold contract with this model.

The Equal Units Approach allows you to give each investment or

futures an approximate equal weighting in your portfolio. It also has

the advantage in that you can see exactly how much leverage you are

carrying. For example, if you are carrying 5 positions in your $50,000

account, each worth about $50,000, you would know that you hadabout $250,000 worth of product. In addition, you would know that you

had about 5-to-1 leverage, since your $50,000 was controlling

$250,000.

When you use this approach you must make a decision about how

much total leverage you are willing to carry before you divide it into

units. It’s such valuable information, so I would recommend all traders

Page 20


keep track of the total product value they are controlling and their

leverage. This information can be a real eye opener.

The equal units approach still has the disadvantage in that it would

only allow you to increase “how much” very slowly as you make

money. In most cases with a small account, equity would again have to

double to increase your exposure by one unit. Again, this practically

amounts to “no” money management for the small account.

Page 21


Model 3 -Percent of Margin

T he third model one might use for money management is to

control your size according to the margin requirements of the

underlying assets. Here, margin refers to the amount of

money that the exchange (or your broker) requires that you put up in

order to purchase one investment unit. If you have less money in your

account than the margin requirements, you’ll need to add more money.

The margin on buying most stock is 50%. Thus, you would have

to have $25,000 in your account to purchase $50,000 worth of stock.

In contrast, the margin on one S&P futures contract is currently

$11,250. Thus, you could purchase one S&P contract, controlling

stock worth approximately $290,000 at today’s (December 1995) price,

with only $11,250 in your account. This would give you leverage of

almost 25-to-l.

Since leverage can be so high with futures, you might want to

control it by limiting your margin to a percentage of your equity. Here’s

how that would work. You might decide to limit your trades to 5% of

margin. In a $50,000 account this would mean that the margin of your

first purchase could be no more than $2,500.

The margin of your second purchase would depend on the equity

model you were using. Lets say you have one open position worth

$2,500 and $47,500 in cash. With the total equity model, your next

purchase could also have a margin of $2,500 - 5% of the total.

However, with the core equity model or the reduced total equity model,

you could only acquire margin in the second position of $2,375 - 5%

of $47.500.

Page 22


Lets look at a few examples of additions using the Total Equity

Model. Currently, the margin on corn is $675. When you divided $675

into your 5% level of $2,500, you get 3.7 contracts. Thus, you could

buy 3 contracts. The margin on silver is currently $2500 so your 5%

requirement would allow you to buy one contract. However, the margin

on bonds is currently $2,700 so you couldn’t buy a bond contract until

you had increased your equity.

You mioht also limit the total maroin of vour account to some value

such as 30%. If you did that, the margin on your total open positions

could never total over $15,000 (i.e., 30% of your $50,000). If you

wished to purchase a new position that would increase your total

margin over that value, you could not do it.

Method three is the first method that allows the smaller account to

begin to increase its exposure as it makes money. It gives you strong

control over your account and some control over the probability of

margin calls.

However, margin amounts can change daily for each contract, so

you will have to keep track of them. In addition, the margin values are

arbitrarily set by the exchanges and the brokerage houses. They tend

to relate to both the volatility and the leverage in a particular contract,

but the amount set is still quite arbitrary. As a result, the margin

method of money management doesn’t necessarily give you equal

exposure across all positions.

Page 23


Model 4 - Percent Volatility

V olatility refers to the amount of daily price movement of the

underlying instrument over an arbitrary period of time. It’s a

direct measurement of the price change that you are likely to

be exposed to - for or against you - in any given position. If you

equate the volatility of each position that you take, by making it a fixed

percentage of your equity, then you are basically equalizing the

possible market fluctuations of each portfolio element to which you are

exposing yourself in the immediate future.

Volatility, in most cases, simply is the difference between the high

and the low of the day. If IBM varies between 115 and 117%, then its

volatility is 2.5 points, However, using an average true range takes into

account any gap openings. Thus, if IBM closed at 113 yesterday, but

varied between 115 and 117% today, you’d need to add in the 2 points

in the gap opening to determine the true range. Thus, today’s true

range is between 113 and 117% or 4% points.

Here’s how a percent volatility calculation might work for money

management. Supposed that you have $50,000 in your account and

you want to buy gold. Let’s say that gold is at $400 per ounce and

during the last ten days the daily range is $3.00. We will use a 4-day

simple moving average of the average true range as our measure of

volatility. How many gold contracts can we buy?

Since the daily range is 53.00 and a point is worth $100 (since the

contract is for 100 ounces), that gives the daily volatility a value of

$300 per gold contract. Let’s say that we are going to allow volatility tobe a maximum of 2% of our equity. Two percent of $50,000 is $1,000.

If we divide our $300 per contract fluctuation into our allowable limit of

Page 24


$1,000, we get 3.3 contracts. Thus, our money management, based

on volatility, would allow us to purchase 3 contracts.

Lets do one more example, using a total equity model. Gold is

now $405 per ounce, so the value of our open position has increased

our equity by $500 per contract or $1,500. Thus our total equity is now

$51,500. We now want to buy a bond contract, Lately, bonds have

been fluctuating by about 0.75 points per day. Thus, the dollar value

of the daily fluctuation is $750 (0.75 times $1,000 per point). Our

money management says to limit our risk to 2% of equity, and 2% of

$51,500 is $1,030. The daily $750 fluctuation in bonds, divided into

$1,030 works out to be 1.37, allowing us to buy one bond contract.

Notice that the daily fluctuation from bonds ($750) is about two

and a half times the daily fluctuation in gold ($300). As a result, we’ve

ended up with three gold contracts compared with only one bond

contract. Thus, we can expect about the same amount of price

fluctuation, in the short term at least, from both positions.

If you use volatilitv in vour money management, YOU miqht also

want to limit the total amount of volatility to which vour portfolio is

exposed at anv one time. Five to ten percent is a reasonable number.

Suppose, for example, that your exposure were 10%. Thus, you could

have five positions, since your individual position limit is 2%. If all of

your positions went against you at once in a single day, and you

stayed in the market, it would mean that you could lose as much as

ten percent of the value of your portfolio in a single day.

How would you feel if your $50,000 portfolio went down to $45,000

in a single day? If that’s too much then 2% and 10% are probably too

big for you.

Page 25

Spedal Report on Money Mangement

you make money and conserve profits. It includes concepts like

percent risk, group risk, making daily or hourly adjustments, optimal f,

and playing the market’s money. I would suggest that you study Part l

until you really understand it before you move onto Part II.

Reference Notes for Part 1:

1. Brinson, Singer, and Beebower. Determinants of PortfolioPerformance II: An Update, Financial Analysts Journal, 47, May-June, 1991, p 4049.

Page 27

Special RepoR on Money Mangement

Special Report onMoney Management - Part II

M oney Management - Part II is a continuation of the money

management series. Money management is that part of

your trading system that tells you “how much” when you

open a position in the market. Part I discussed three equity models:

total equity, core equity, and reduced total equity. It also discussedfour money management models: 1) the one unit per so much equity;

2) the leverage model; 3) the percent margin model; and 4) the

percent volatility model. The four models can be combined with each

of the equity models to produce 12 different money management

models - even more if you combine them or add creative money

management.

In Part II you’ll learn five more money management models, givingyou many additional ideas that could have a great impact on your

bottom line profits. You’ll also learn how to design a system using

these models to fit your particular objectives. In addition, we’ll also

explore creative money management, so you can get some idea where

you really need to focus your attention in system development.

Page 28


Model 5 - Percent Risk

When you enter a position, it is essential to know that point

at which you would get out in order to preserve your

capital. This is your “risk.” It’s your worst case loss -

except for slippage and a runaway market going against you.

One of the most common money management systems involves

controlling position size as a function of this risk. Let’s look at an

example of how this money management model works. Suppose you

want to buy gold at $380 per ounce. Your system suggests that if gold

drops as low as $370, you need to get out. Thus, your worst case risk

per gold contract is 10 points times $lOO/point or $1.000.

You have a $50,000 account. You want to limit your total rjsk on

your gold position to 25% of that equity or $1,250. If you divide your

$1,000 risk per contract into your total allowable risk of $1,250, you get

1.25 contracts. Thus, your money management using model 5 will

only allow you to purchase one contract.

Suppose that you get a signal to sell short corn the same day.

Gold is still at $380 an ounce, so your account with the open position

is still worth $50.000. You still have $1,250 in allowable risk for your

corn position based upon the total equity model.

Lets say that corn is at $3.03, and you decide that your maximum

acceptable risk would be to allow corn to move against you by 5 cents

to $3.08. Your 5 cents of allowable risk (times 5,000 bushels per

contract) translates into a risk of $250 per contract. If you divide $250into $1,250, you get 5 contracts. Thus, you can sell short 5 corn

contracts within your money management paradigm.

Page 29

In these examples, we’ve used a total equity model to calculate

our risk, where total equity refers to the cash value of the account plus

the value of all open positions. In contrast, lets see what would

happen if we used a core equity calculation of risk. In the core equity

model, the risk involved in open positions is subtracted from the cash

value when those positions are opened and only the remaining cash

value is used in subsequent calculations.

First, we purchased a gold contract and our total risk exposure in

that contract was $1,000. In the core equity model, our new core

equity is $1,000 less. Thus, we only have $49,000 left on which to

base the risk for our next position in corn. Since our money

management allows us to risk 2.5% of this core equity, we can risk

$1225.

We now want to sell short corn with a risk of $250 per contract. If

you divide $250 into $1,225 you get 4.9 contracts. Thus, the core

equity model would only allow you to sell short 4 corn contracts. Notice

that to be conservative and not exceed our parameters, we always

round down to the nearest whole unit.

Lets say that your next purchase of corn isn’t the same day. You

get your signal six weeks into the future. You still have an open

position in gold, but now gold is $490 per ounce. Thus, your open

position is worth $11,000. As a result, your total equity is now

$50,000, plus the value of the open position, or $61,000.

If you are using the total equity model, you can now risk 2.5% of

$61,000. Therefore, you could now risk $1525. If the corn signal

occurred with $250 risk per contract, your money management would

now permit you to sell short 6.1 ($1525 divided by $250) contracts. In

contrast, the core equity model would still be based upon $49,000 and

would only allow you to sell short the same 4 contracts of corn.

Page 30


Obviously, of the three equity models, the core equity model is the

most conservative. Reduced total equity ranks in the middle, and the

total equity model is the most risky model.

How does the percent risk money management compare with the

percent volatility money management discussed in the last issue?

Table 4 shows the S/21-day breakout system (used as an illustration

in Tables 2 and 3) with a money management algorithm based upon

risk as a percentage of equity. The starting equity is again

$1 ,ooo,ooo.

%Risk [ Net Profits 1 Rejected 1 Gain Margin Maximum RatioTrades per Year Calls Drawdown

0.10% $327 410 0.00% 0 0.36% 0

0.25% $80,685 219 0.70% 0 2.47% 0.28

0.50% $400.262 42 3.20% 0 6.50% 0.49

0.75% $672,717 10 4.90% 0 10.20% 0.48

1 .OO% $1,107,906 4 7.20% 0 13.20% 0.54

1.75% $2.776,044 1 13.10% 0 22.00% 0.6

2.50% $5.621.132 0 19.20% 0 29.10% 0.66

5.00% 1 $31.620.857 1 0 1 38.30% 1 0 1 46.70% 1 0.82 1I

I 7~50% I 9116~500~000 I 0 I 55~70% II 0 I 7070% I

0 1 62.20% 1 0.91I I 72~7n% 1 0~97

I n I 2 ) 87.30% 1 1.01 10 I 21 1 84.40% 1 1.09 1

I f-l I 9s 5nx II n I1 206 1 0.00% 1

Table 4: 22:21 Breakout System with Risk MoneyManagement

If you cornpAre Table 4 with Table 3 from Money Management

Part I, you’ll notice the striking difference in the percentages at which

the system breaks down. These differences are the result of the size

of the number (i.e., the current 21-day extreme against you versus the

20-day volatility) that you must take into consideration before using the

Page31

special aepd on Money hiangement

equity percentages to size positions. Thus, a 5% risk based upon a

stop of the 21 day extreme appears to be equivalent to about 1% of

equity with the 20 day average true range. These numbers, uponwhich the percentages are based, are critical. They must be

considered before you determine the percentages you plan to use to

size your positions.

Notice that the best reward-to-risk ratio occurs at about 25%, but

you would have to tolerate an 84% drawdown in order to achieve it. In

addition, margin calls (which are set at current rates and not

historicatlv accurate) start entering the picture at 10% risk.

If you traded this system with $l,OOO,OOO and used a 1% risk,

your bet sizes would be equivalent to trading the $100,000 account

with 10% risk. Thus, Table 4 suggests that you probably should not

trade this system unless you had at least $100,000 and then you

probably should not risk more than about ‘/2% per trade. And at %%,

your returns with the system would be very poor.’ Essentially, you

should now understand why you need at least a million dollars to trade

this system.

Just how much risk should you accept per position with risk money

management? Your overall risk using risk money managementdepends upon the size of the stops you’ve set to preserve yourcapital and the expectancy of the system you are trading. Forexample, most long-term trend followers use trailing stops that are

fairly large, several times the average daily range of prices. In

addition, most trend followers are usually using a model that makes

money 4050% of the time and has a reward-to-risk ratio of 2.0 to 2.5.

If your system does not fall into these ranges, then you need to

determine your own money management percentages.

With the above criteria (and precautions) in mind, if you are trading

other people’s money, you probably should risk less than 1% per

Page 32


position. If you are trading your own money, your risk depends upon

your own comfort level. Anything under 3% is probably fine. If you

are risking over 3%, you are a “gunslinger” and had better understand

the risk you are taking for the reward you seek.

If you trade a system that sets very small stops, then you need to

adopt much smaller risk levels. For example, if your stops are less

than the daily range of prices, then you probably need guidelines that

are about half (or less) of what we present here. On the other hand, if

you have high expectancies in your system (your reliability is above

50% and your reward-to-risk ratio is 3 or better), then you can probably

risk a higher percentage of your equity fairly safely. People who use

very tight stops might want to consider using a volatility model to size

their positions.

Most equity traders don’t consider this sort of model at all. Instead,

they tend to think more in terms of the equal-units model. But let’s look

at how “risk money management” would work with stocks.

Let’s say you want to purchase IBM and you have a $50,000

account. IBM’s price is about $111 per share. You decide that you

would get out of this position at $107, or a drop of $4 per share. Your

money management routine tells you to limit your risk to 2.5% or

$1250. When you divide 4 into 1250 you come up with 312.5 shares.

If you bought 312 shares at $111, it would cost you $34,632 -

over half of the value in your account. You could only do that two

times without exceeding the marginable value of your account. This

gives you a better notion of what a 2.5% risk really means. In fact, if

your stop was only a $1 drop to $110, you could purchase 1250

shares based upon the model. But that 1250 shares would cost you

$138,750 - which you couldn’t do even by fully margining your

account. Nevertheless, you are still limiting your risk to 2.5%. The

Page 33


risk calculations, of course, were all based upon the starting risk - the

difference between your purchase price and your initial stop loss.

Page 34


Model 6 - Periodic Money ManagementAdjustments

C onsider monitoring your money management on a periodic

basic - weekly, daily, or even hourly - to maintain a fairly

constant exposure. Think about the potential here. You

could monitor each position and make sure that your exposure was

always 1% or less. This means that, except in runaway markets, your

biggest risk would always be about 1%.

Your exposure could be monitored using any of the money

management models given or any of the equity models suggested.

However, I would suggest that you consider monitoring both ongoing

risk and ongoing volatility with a total equity calculation.

Here’s how daily monitoring for risk and volatility might work. Lets

suppose you have a $200,000 account and you have open positions in

gold and corn. Your money management says you will keep your

initial risk to 2% of equity and your ongoing risk at 3% of equity.

You’ve purchased four long gold contracts at $400 per ounce with a

stop at $390, so you now have open risk of $1,000 (i.e., 10 points

times $100 per point) per contract, or $4.000.

The next day at the close you monitor your open risk. Lets say

gold has jumped to $440 overnight. Your gold stop is now $410. The

$40 increase in gold has increased your equity by $16,000 (i.e., 4

contracts times 40 points times $lOO/point). Thus, your total equity is

worth $216,000. Your open risk for gold is now at $30 (i.e., $440 less

$410) per contract. The total value of that open risk is $3000 (i.e., 30

times $100 per point) per contract or $12,000.

Page 35


You have decided to monitor your open risk on a dailv basis and

keen it at 3% of total equity. Doing so still allows you to follow your

trading model. More importantly, it reduces the chances of any large

declines in equity occurring in a short period of time. Since 3% of

$216,000 is $6,480, you can now only afford to keep two gold

contracts. You must sell off the remaining two contracts.

Some of you might say, “why not raise your stop so that you could

keep the four gold contracts?” Remember, money management is a

separate part of your system that tells you how much. If you altered

your stop, you wouldn’t be following your trading system which now

says that your stop should be at $410 - your exit and your money

management would start to merge. By selling two contracts, you are

simply’ reducing your risk in order to keep your total risk within

acceptable limits on a daily basis according to your money

management guidelines. You still have the opportunity to profit if gold

keeps moving in your favor and you won’t be giving back as much of

your profits should gold suddenly decline. Thus, you are making a

money management decision to maintain a constant risk in your

portfolio.

Let’s see how the same adjustments might occur with volatility.

Suppose you have a $200,000 account and you decide to buy corn at

$3.00. Your model says that you will buy enough corn so that the

daily volatility of corn was only 1% of your total equity. In addition, you

will never allow the daily volatility to go beyond 2% and you elect to

monitor daily volatility each Monday.

Assume that the daily volatility was 8 cents when you purchased it.

This translates into a price range of $400 per day (i.e., 5,000 bushels x

8 cents/bushel = $400). You decided not to allow volatility to exceed

1% of your $200,000 equity or $2,000 when you purchased the corn,

so you bought five contracts.

Page 36


Suppose corn jumps to $4.00 over the next month so that your five

corn contracts have given you a profit of $25,000. The daily volatility

of corn is now 20 cents. Since your total equity is now $225,000, you

can now allow your daily equity to fluctuate by 2% of that amount or

$4500. However, corn volatility is now $1000 per contract. You have

five contracts, giving you a total volatility of $5,000. As a result, you

must sell one corn contract according to the criteria of your periodic

volatility money management model.

Generally, when something begins to increase in price dramatically

the volatility will also go up dramatically. If you are in such a move,

you might find that you have a $100,000 starting account that’s now

worth $500,000. In addition, because of the large increase in the daily

price volatility, you might find that your account changes value by as

much as $100,000 each day. By keeping a volatility adjustment as

part of your money management, you protect your open profits and

prevent such large daily fluctuations in your account.

I’ve shown examples of periodic monitoring of your money

management for the risk and volatility models. However, you can do

periodic monitoring with all of the models mentioned. You can even do

a combination of them, such as monitoring risk and volatility

simultaneously. Are you beginning to see the possibilities?

Page 37


Model 7 -Group Control

One of the most important factors in risk control ishaving a diversified portfolio. Trading a number ofitems generally spreads your risk around, providedthat price changes in those items have a low-correlation.

Here’s how Group Control works. Suppose you are trading a

system that makes money in 5 of 12 trades. The average winning

trade is about 2.5 times the size of the average losing trade. In

addition, the system only generates about one trade per month per

investment vehicle. If you only traded one instrument you wouldhave about one trade each month. This means your chances ofhaving a winning month are only about 41.7%. You could easily

have six months of losses and become discouraged.

Suppose that you trade 10 different instruments that are all

independent of each other. Each one of them, let’s say, is likely to

generate a trade each month. Table 5 (on the next page) shows 1)

the number of losing trades out of 10 you might have, 2) the chances

of that happening, and 3) the amount of money you’d make or lose on

that combination assuming an equal unit risk on each trade and a 2.5

to-l reward-to-risk ratio.

Notice that you would need to have less than three winning trades

out of ten in order not to make money. The chances of that occurring

on a given month (in which you have IO trades) is the sum of the first

three probabilities or 14.2%. Thus, with 10 independent markets, youonly have a 14% chance of having a losing month.

Page 38


I Number of 1 Amount IWinning Trades Probability won / Lost

None 0 . 0 0 4 6 Minus 10 unitsO n e 0~0326 Minus 7.5 units

I TWO 1 0.1047 1 Minus 3 units 1

Table 5: Possible Results with 10 Independent Units

When you try to put this plan into effect, however, you run into the

difficulty that most trades are not independent. Stocks tend to go up

and down together. During bull markets, there are tendencies for

certain groups of stocks to move together. For example, much of the

stock market move in 1995 was due to technology stocks. When the

move was over, technology stocks tended to fall as a group - and, as

early as 1996, many of them already have.

Commodities also tend to have groupings that are highly

correlated. Grains, metals, meats, stock indices, currencies, energies,

etc. might each tend to move as a group in the same direction at the

same time.

Thus, your goal through money management is to minimize the

number of highly correlated positions in your portfolio at any given

time. You could do this by preselecting a limited number of vehicles in

which to invest or trade. This is the portfolio selection part of system

design.

Page 39

Special Report on Money Mangsment

However, you can also accomplish this diversification by having a

money management algorithm limiting your total group exposure by

using one of the methods presented so far. For example, you could

limit the amount of leverage in any one group. You also could limit the

amount of risk, volatility, leverage, margin, or total number of units of

exposure that you have in any one group. This has the advantage of

limiting your group exposure, while avoiding the possibility of missing a

good opportunity because it is not part of the portfolio which you have

preselected to trade.

Suppose your overall money management algorithm is to limit the

new risk on any given position to 1% of equity. Your model calls for

you to trade any liquid commodity that tends to fit your trading model.

When you do that, however, you might find yourself with a portfolio of

US bonds, IO year notes, t-bills, eurodollars, munibonds, German

Bunds, etc. That wouldn’t be prudent, because your entire portfolio

would be controlled by interest rate fluctuations. As a result, you

decide to limit your total group risk to 3%. Based upon your initial risk

allocation, the most you could have is three 1% positions in any one

commodity grouping.

Note that your group money management model could be based

upon any of the first five models presented - the one unit per so

much equity model, the leverage model, the margin model, the

volatility model, or the risk model.

Page 40


Model 8 - Portfolio Heat

I t’s also important to limit the total risk to which your portfolio is

exposed. This value has been called portfolio heat by Ed

Seykota and Dave Druz’. Most great traders would argue that 20-

25% is probably a maximum level for your portfolio heat. However,

portfolio heat should also depend upon how good your system is. For

example, a 60% system with average gains that are 4 times the size of

average losses could have a much greater portfolio heat than a 50%

system with a 2-to-1 gain-to-loss ratio

A good rule of thumb for determining your portfolio heat is to

calculate the Kelly criterion for your system (see page 50). The Kelly

criterion gives you a good approximation for the maximum risk

possible for your system. Eighty percent of that value is probably a

good number to pick for your total portfolio risk. However, if 80% of

the Kelly criterion for your system is still above 25%. you could be

flirting with danger.

Once you have a number in mind for your portfolio heat, work

backwards to determine the individual risk on any given position. How

many positions are you likely to have on at any given time? Take your

maximum number of positions and divide that into the number you’ve

just calculated for your portfolio. That’s probably a good estimate for

the maximum amount of risk you should assume for a single position.

However, these guidelines also make the assumption that you are

going for maximum gains in your portfolio.

Portfolio heat was a term coined for the total risk of your portfolio.

However, you could apply any of the first five models, or a combination

Page 41


of them, to your total portfolio. Notice how money management is

getting more complex and more sophisticated as we add more models.

Page 42


Model 9 - Long versus Short Positions

S everal famous traders have distinguished between long and

short positions in considering group risk and portfolio heat.

They believe that they somewhat counteract each other, so

that one long position and one short position - each at your desired

market money management level -would just need to be counted as

one unit. In other words, a 1% risk in a long corn position and a 1%

risk in a short bond position might be grouped together as one 1% unit

of risk. This puts an interesting twist to many of the money

management models already presented.

Equating different long and short positions, of course, can only be

used with those models which equate your exposure. Thus, it would

not be applied to Model 1, but you could apply it with Models 2 through

5.

Page 43


Using Money Management toMeet Your Trading Objectives

G iven the models and ideas in money management

presented in this special report, it is now possible for you to

design a system to meet your objectives - such as trading

a high-reward-to-risk ratio system for managing other people’s money

or getting a very high rate of return trading your own money. You just

have to know what you want to accomplish and then focus on that.

You also need to realize that money management is the area of your

system that will have the greatest impact on the bottom line - your

profits, your drawdowns, and your reward-to-risk ratio.

Page 44


Designing a High Reward-Risk System forManaging Money

T he first part of your system design should focus on building

the highest possible expectancy into your system, where

expectancy is defined by the following formula:

Expectancy = (Probability of Winning * Average Win)Minus (Probability of Losing l , Average Loss)

The main variables in developing a high expectancy system are to

find: 1) an entry technique that will give you the highest possible

percentage of winning trades; 2) an initial stop loss that will preserve

your capital; and 3) an exit (or multiple exits) that will capture as much

money as possible from the market. Once you’ve developed the

highest possible expectancy, I would suggest that you take the

following steps in order to develop the best reward-to-risk ratio using

money management.

1) In a given period of time, the more trades you have with thesame expectancy, the less likely it will be that you will have aloss. Consider developing a high expectancy system that generates

lots of trades during the minimum time period in which you must be

profitable. One trade might only have a 30-40% chance of being

profitable. But 50 such trades with a high expectancy over a similar

time period are highly likely (i.e., 75% or better) to be profitable -

especially if the trades are non-correlated.

2) Examine the concept behind your idea and determine ifthere is a money management model presented that logically fits

Page 45


the system you’ve developed. For example, if you use very tightstops, then a percent risk model would be very dangerous unless youuse very low risk (Le., 0.1% risk). Consequently, a model such aspercent volatility might fit you better.

3) Determine what fits best? Test your system with all of themodels presented, using different percentages of equity and differentequity models. Determine which model and what percentage givesyou the best reward-to-risk ratio.

4) Consider using daily money management adjustments. Thismeans limiting the maximum exposure of your total system and anygiven positions. For example, what if you calculated your risk perposition hourly and never let it go beyond 2%? It would, tend tosmooth out both your equity fluctuations and your peace of mind -knowing it was always 2%.

5) Think about using multiple trading systems with differentmoney management models. Perhaps the most sophisticatedmethod of keeping a high reward-to-risk ratio is to employ several non-correlated trading systems. Each system should have its own moneymanagement parameters, depending upon what you are trying to dowith that system. When using multiple systems in this manner, youshould be able to generate a lot of high-expectancy trades that arenon-correlated. As a result, you should have profitable tradingmonths as long as you have markets in which at least one of yoursystems can make money.

6) Use some creative money management to make yoursystem unique. The models presented have all given been linear. Ifyour portfolio goes up, you risk more. If your portfolio goes down, yourisk less. Consider using creative money management. I’ll show youexamples of creative money management in the next section, butcreative money management mostly depends upon your creativity If

Page 46


you put as much effort into creative money management as most

people put into figuring out how to enter the market, your trading

methodology should be superb.

Special R~?port on Money Mangement

How to Produce Maximum Profits

Before starting this section, I would like to cautionraaden that the techniques suggested are quitedangerous unless you fee/ vary confident about yourdiscipline and your own psychological make up. Ifyou use some of the techniques suggested and forgetabout your discipllna, then your capi ta l coulddisappear very quickly.

These techniques are also very deadly if you areinadequately capitalized. But for some of YOU withesoeciallv small accounts, (i.e., under $50,000), whoinsist on going for high rates of return, followina thediscldine in these techniaues may. be the onlv hoDeYOU have to keeD you from sure ruin.

If your goal is to only trade proprietary money and you can toleratelarge fluctuations in your account value, then you may want to build atrading system designed to give you the maximum rate of return. Manybooks have been written about how to maximize profits. Ironically, thekey to maximum profits is simple money management. You mustbalance how much you are willing to make with how much you arewilling to lose and be sure your losses never put you so far into thehole that you cannot successfully return.

!%Qe 48

Special Rapart on Money Mangement

Technique I -Get Best Reward-to-Risk Ratioand then Leverage Yourself

Let’s say you’ve developed several systems that together give

you an average return of 20% per year with a maximum

drawdown of about 4%. If you can achieve that, then you’ve

got a reward-to-risk ratio of 5 to 1. That kind of record is

outstanding and few other traders can duplicate it. As a result, the

best way for you to produce maximum profits is to simply leverage

yourself. For example, if you traded $100,000 as if it were $500,000 in

that system, then you’d probably have an annual return of 100% with a

maximum drawdown of about 20%. This is much better than simply

going for a system that produces the highest rate of return.

Page 49

Special Repor! on Money Mangement

Technique 2 -Optimal f and the Kelly Criterion

Ralph Vince has suggested that if “you are not trading for optimal

profits, then you belong on a psychiatrist’s couch rather than in the

markets” 3 Yet, trading for optimal profits also means trading with

large drawdowns. For most people, such drawdowns are totally

unacceptable. They probably would stop trading at the bottom of the

drawdown as a net loser and have no chance of letting the system

work. Nevertheless, its possible to make large rates of return by

simply adding “optimal” money management to your trading system.

Ralph Vince’s solution to optimal money management is to risk an

“optimal fixed fraction” or ‘7 of one’s largest “historical drawdown.” In

Vince’s word’s:

“For any given independent trial situation, which you

have an edge (i.e., a positive mathematical expectation),

there exists an optimal fixed fraction (fj between 0 and 1

as a divisor of your biggest loss to bet on each and every

event to maximize your winnings. Most people think that

the optimal fixed fraction is the percentage of your total

stake to bet. This is absolutely false. Optimal f is the

divisor of our biggest loss, the result of which we divide

by our total stake to know how many bets to make or

contracts to have on.” Portfolio Money Management, p.80. 4

I have two problems with optimal “f’ as a guide for optimal gains’.

First, since it is based upon one’s largest historical loss, it makes the

assumption that you have’ already had your worst loss. It’s much

Pap 50


more useful for the average trader to assume that one’s worst loss has

never occurred.

Second, the calculations require an iterative mathematical

procedure that is quite complex. Vince is a man who has had no

college education, but has studied mathematics extensively. This

unusual combination has made him very difficult to read, even for

someone schooled in mathematics. For example, he’ll introduce a

rather vague term, like Terminal Wealth Relative, and then simply refer

to it as TWR throughout the rest of the book.

Thus, Vince’s formula for optimal f amounts to using a computer

(and perhaps Vince’s own software) to test all possible values between

0.01 and 1.00 increments of Terminal Wealth Relative or TWR. His

exact formula is:

For the reasons suggested, I much prefer the Kelly Criterion for

estimating maximum bet size. Vince says that the Kelly Criterion

should not apply to trading - it only applies to win-loss type data.

However, you can use your past trading (or historical testing) to

determine,the information you need.

Basically, you need your winning percentage (which we’ll call W)

and you need the average size of your winning trades divided by the

average size of your losing trades (which we’ll call R). Thus, the Kelly

criterion can be calculated as follows:

Kelly % = W - [(1 - W)/R]

Let’s look at how the Kelly Criterion might work. Suppose you

have a system that has a winning percentage of 0.5. Your system also

has average profits that are twice as large as the size of your average

Page51

Special Report on Money Mangewent

loss. Thus, W = 0.5 and R = 2. Using these numbers results in the

following.

Kelly % = 0.5 - [(I - 0.5)/2]

= 0.5 - [0.5/2]

= 0.5 - 0.25

= 0.25

Thus, the percentage of equity bet that would provide a maximum

rate of return is 25%.

However, if you have a system that is right 50% of the time, you

can easily be wrong 10 or even 20 times in a row during a large

number of trials. Thus, you could never risk 25% of your remaining

equity - unless you like the kind of drawdowns show in Table 4 at the

2530% level.

The Kelly Criterion can still be useful for people wanting to go for

optimal rates of return. Simply take about 80% of the Kelly Criterion -

in this case 80% of 25% is equal to 20%. Figure out how many trades

you are likely to have on at one time and then divide your 80%-Kelly

value by that number of trades. For example, if you are likely to have

on as many as 10 trades at one time, then your optimal risk size would

probably be about 2% using this system.

Page 52


Technique 3 -Playing the “Market’s Money”

Perhaps the best way to go for top returns is to distinguish

between your starting equity and the market’s money. You

can’t do this with other people’s money, because they

typically get upset-even when you give back open profits.

Suppose your objective is to achieve a maximum income by some

future date. You’re willing to do whatever it takes to increase that

income as long as you don’t lose your starting equity. On that

assumption, you can design a special system that risks very little of

your starting equity and instead risks the markets money at an optimal

level.

As an example, suppose you start January I*’ with $100,000. Your

objective is to make as much money as you can by December 31”

while risking as little as possible of your starting equity. Here’s one

way you might do it:

You might begin by risking only 1% of your starting equity, but be

willing to use an optimal level (or near optimal level) with the market’s

money. Let’s say that you’ve determined that your system is optimal

risking 20%. However, you’ve determined that you might have as

many as five positions in the market at any one time (and this is the

maximum you will have). Consequently, you are willing to risk up to

4% per position at an optimal level.

The real advantage of this system is that, as soon as you move

into profits, your ability to make profits goes up dramatically - but so

does your risk. Let’s say that your first position is in crude oil. Youinitially risk 1% of your $100,000 or $1.000. By the time, your second

Page 53

Special Report on Money Mangemerit

trade comes along, you have $3,000 in open profits. You can now risk

$1,000 of your original equity plus 4% of your open profits or $120.

Thus, you can assume $I,,120 worth of risk on your second trade

under this model.

Imagine you’ve been doing really well with this model. By March,

you’ve accumulated $25,000 in new profits. At this point, you are now

risking $1,000 (1% of your starting equity) plus 4% of your $25,000 in

new profits or another $1,000. Your risk (Le., your ability to profit) has

now doubled even though your equity has only gone up by 25%.

Of course, trading doesn’t necessarily bless you by starting out

with big profits. You might begin with a losing streak. If you want to be

careful about protecting your starting equity, you may want to cut back

your risk if you go into a drawdown in your starting equity. For

example, you may decide that if you lose 5% of your starting equity

(i.e., and get down to 595,000) you’ll cut your risk down to 0.9%. If youdrop another 5% down to $90,000, you’ll cut your trading risk down to

0.8%. Since your trading risk drops down dramatically as you move

into your equity, you are not likely to lose much of your starting equity.”

Page 54

Spedal Report on Money Mansement

Technique 4 -Creative Money Management withthe Market’s Money

A nother equally profitable money management routine allowingyou to build your capital quickly amounts to playing the

market’s money through pyramid money management and

stop adjustment. For example, suppose you have a $100,000

account and you want to make your money grow as rapidly as

possible, You are using a 3 times volatility stop as I did in the random

entry trading system (reference Course Update #23a). You’ve also

decided that your system is optimal risking 24% of equity at a time,

using a reduced total equity model. You plan to have as many as six

open positions at one time, so you are willing to risk up to 4% per

position - but not all at once. You’ll build up to a position as big as

4% as your profits increase. Your initial risk will only be 2%.

Let’s see how such a money management system might work.

You buy corn at $3.025. The ten day average true range (which we’ll

call “V”) is 3.5 cents. Therefore, a 3 times volatility stop is 10.5 cents

(i.e., at $2.92) which amounts to a total risk of $525. You can risk 2%

of your $100,000, which amounts to 3 contracts (rounded down to the

nearest contract).

Your pyramiding scheme is to add one contract every time your

profit increases by one daily volatility or V (i.e., which is currently 3.5

cents). When this occurs, (i.e., corn moves to $3.06) you risk another

2% with a 3 times V stop at $2.955. However, your stop on the

original position moves up by 3.5 cents to $2.955. Thus, you now

have six contracts all with stops at $2,955. However, notice that vour

total exposure of your oriainal eouitv is now onlv 3% (actuallv less due

to roundina) because YOU raised vour initial stoo.

Page 55


Let’s say that your daily volatility now increases to 4 cents. Thus,

a new stop would now be 12 cents or $600. Corn moves up to $3.10,

so you can now risk another 2%. (Actually, you could have done so at

53.095 - when the price had increase by the old V-value of 3.5

cents.) Your reduced total equity is now $97,000 and 2% of that is

51,940. As a result, you can still purchase 3 contracts at $3.gO -

with a stop at $2.98. You also get to raise your stop on both of your

other units by their respective V-values. Therefore you now have six

contracts with stops at $2.99 and three contracts with a stop at $2.98.

You might be saying, “How can you do that? Your risk is over the

3% limit with the reduced total equity model.” No, it isn’t because you

raised your other stops enough so that your exposure is still about 3%

of your reduced total equity.

Table 6

Table 6 summarizes your current position. Notice that your total

risk to your original $100,000 is now $3,375 (or 3.375%).

Let’s say that volatility stays at 4 cants and corn now goes to

$3.14. Its time to risk another two percent. Your reduced total equity

is now $96,525. You can risk 2% of that or $1932.50. Your 12 cent

stop is a 5600 risk, so you can again purchase another 3 contracts.

You ‘must also raise your stops on the existing contracts. The stop on

the first six contracts raises to 53.025 (i.e., it was raised 3.5 cents, the

original V). The stop on the last three contracts raises to 53.02.


Consider where you are with respect to the reduced total equity

model in terms of risk, You now have risked 2% four times, but have

you exceeded your 4% limit?

Contracts 1 Current Remaining Risk in Total Risk to

Table 7

The total risk to your original equity is now only $3,550 or 3.55% -

still under our 4% limit. So let’s say corn starts to really get volatile

now and V goes to 6 cents. And you get a chance to buy more corn

as it goes up to $3.20 (actually you could buy at $3.18, when it

increased by the last value of V). But we’ll say that you buy at $3.20.

Your total reduced equity is now $96,450 and 2% of that is $1,929.

Your new stop, at 3 V, is now 18 cents or $900. Thus, you can nowonly purchase two contracts, but you also get to raise your other stops.

Let’s say that we make a decision to leave the breakeven stop alone,

giving it plenty of room to move. However, you can now move the stop

on the second 3 contracts purchased to breakeven; move the stop on

the contracts purchased at $3.10 to $3.06; and move the stop on the

contracts purchased at $3.14 to $3.06. Thus, the current risk picture is

shown in Table 8.

Notice that by the reduced total equity model, your risk has

changed very little. The risk to your original equity is now $3,600 or

3.6%.

Special Rep017 on Money Mangement

1 Contracts 1 C u r r e n t 1 Remalnlng Risk in 1 Total Risk to

I I I I3 a t $3.06 $3.06 0 03 a t $3.10 53.06 4 cent5 12 cents = $6003 a t 53.14 $3.06 8 cents 24 cents = 51,2007 q t sn,20 $3~02 18 cents 36 cents = $1,800

Table 8

Corn now goes to $3.26, and V remains at 6. As a result, you

decide to add another 2% and raise your other stops by their previous

V values. Again, you can only buy two more units and their stop is

now 53.08. Your portfolio now looks like Table 9.

Contracts c u r r e n t Remaining Risk in Total Risk to

Stop Original Equity Original Equity3 at 53.025 $3.025 0 03 at $3.06 $3.06 0 03 at 53.10 $3.10 0 03 at $3.14 53.10 4 cents 12 cents = 56002 at 53.20 53.08 12 cents 24 cents = $1,2007 at s3 7fi $3~08 I a C~S 36 cents = $1.800

Table 9

Notice that your original exposure is still just 53600. If the market

kept going up, you could continue to add contracts to your portfolio -

even if you never raised any of your stops past breakeven - and you

would still be unlikely to exceed your 4% risk ceiling per position.

However. you do run the risk of a series of limit moves aaainst you. As

a result, you must set a physical limit to the total number of times that

you are willing to add 2% more risk and increase your stops.

Now let’s say the market dropped the next day and gave you a sell

signal (i.e., your sell signal is independent of your money management

stops). You get out at 53.21. Basically, you’d make 55.5 cents on thefirst 3 contracts; 45 cents on the next three contracts, 33 cents on the

Page 58

Special Report on Money Msngement

next three contracts, 21 cents on the next three contracts, and 2 cents

on the next 2 contracts. You’d lose 10 cents on the last two contracts.

Your total profit is $7,325.

Initially, you only risked $1575 on what might have been a false

signal, You only added risk as the signal proved itself. Had you

invested the 4% initially, you would have purchased 7 contracts at a

risk of $3,675. Those 7 contracts would have made you $6,475.

Some of you might be saying “... but you ended up with 16

contracts. It might have been disastrous if you’d had some limit

moves against you.” That’s true. but my point was to show you

creative money management. A method very similar to the one

described has been used by a number of well-known traders to

produce consistent and very large rates of return. Furthermore, you

could offset the risk with options which would avoid the risk of a

runaway market against you7

There are any number of variables that you can vary in creative

money management - your initial stop, your maximum risk per

commodity, moving your stops in your favor, your equity model, your

money management model, etc.. For example, you could even use

the idea of increasing your “reduced total equity” by raising your stop

to justify opening up positions in other commodities. This could really

help the small trader who does not have a large enough account to

trade using most of these models.

Page 59

Special Report on Money Mansement

Conclusion

M y point in writing this report is to get you to think aboutmoney management (especially, creative moneymanagement) instead of just creative entry techniques.

Money management is the most important part of a tradingsystem. Yet for psychological reasons most people avoid thinkingabout it entirely. These money management variables will have muchmore of an impact on your bottom line profits (or losses, if misused)

than the latest entry signal you’ve been studying.

Reference Notes

I. This is basically a Turtle’s System. The difference in the rateof return is basically a difference in the money management presentedhere versus the money management of the Turtles. For informationabout the Turtle systems contact Russell Sands at 3058952951. Mr.Sands currently says he trades 1 contract per $30,000 in hisproprietary account and 1 contract per $100,000 in his fund. Thatsuggests that either Mr. Sands doesn’t understand the original Turtlemoney management (as presented in his manual) or he’s given up onit.

2. Ed Seykota and Dave Drut. Determining Optimal Risk.Technical Analysis of Stocks and Commodities , March 1993, p. 46-49.

3. Ralph Vince The New Money Management. New York: Wiley,1995.

Page 60

Special Repon on Money Mangement

4. Ralph Vince Portfolio Money Management. New York: Wiley,

1995.

5. Vince’s assumption about utility functions, and much of his

thinking rests on these assumptions, show a naive understanding of

human psychology. For example, Vince doesn’t understand that

people are conservative when it comes to even a small profit and very

risky when they have a loss.

6. I’ve known people who have produced return rates as high as

l,OOO% per year using this sort of money management, (using a

system quite similar to the 55-21 day channel breakout that we’ve

used as an example in some of the models presented.)

7. Options are another excellent form of controlling risk, but they

are beyond the scope of this report.

Page El

Learn How To Put An Extra $10,000 - $l,OOO,OOO InYour Pocket-Every Year!

his New Break-Through Program By “Market Wizard” Coach, Dr. Van K. Tharp, AndSystem Expert, Chuck J.,eBeau, Reveals The Little-Known Secrets For DevelopingCustamized, Winning Investing/Trading Systems-Guarunteed.

If you want consistency and you want to make an additional$10.000, $75,ooO, $250,0@3. or even a million dollars in extracash profits from the market over the next year or two andlearn little-known, closely guarded secrets that are notpublished in books and that you’re not likely to find unlessyou accidentally stumble upon them yourself - you’ll want tostudy this new program.

About five nercent of the world’s traders and 20 percent of theworld’s investors, consistently make big money. What theydo is not complex. Iu fact. simplicity is one of the keys tomaking money. And you can do it too.

Our job is to teach you what you need to know to become apeak performing trader or investor. It’s much easier thanteaching you how to manage money for other people. Youdon’t have to invest hundreds of thousands of dollars plus thetime, energy, and resources that it takes to become aprofessional money manager.

Learn how to develop your wealth-building formula from Dr.Tharp’s research by listening to this new cassette tape homestudy course.

This audio cassette program was recorded live from a seminar. It’s a high quality product that contains over18 hours of material that will change the way you look at systems and system development forever. Each ofthe 12 cassettes was professionally recorded and edited and then dubbed onto music quality cassette tapes.The comprehensive manual encompasses over 180 pages and acts as a guide, a workbook and an instructorthrough your system building journey.

The concepts and ideas you will learn could easily improve your trading overnight. Most importantly, theinformation you learn, once it’s properly applied, could easily vault you into a new superstar wealth andsuccess status within a few years. You’ll understand why supertraders continue to make money whileeveryone else is losing their shirts.

Call 919-362-5591 for a free brochure on the three critical secrets you can adopt to develop a superbwealth-building formula, plus nine more secrets you’ll learn from these tapes.

If you concentrate on these three secrets- which 95 percent of all traders and investors totally ignore- thenyou can vault yourself into a class that only a few have been able to achieve.

Your Satlsfactlon Is Guaranteed!

Dr. Tharp’s Monthly Newsletter: Market Mastery

There are hundreds of newsletters available to assist investors and traders. But,you will notice that almost all of them tend to focus on predicting the market,telling you what they think is hot, and giving you other information that mightlead you to think you know exactly what’s going to happen. People seldommake money from that sort of advice. Instead, it tends to be a psychological trapthat leads to selfideshuction. The only consolation is that you get to blame thenewsletter writer for the advice.

It may surprise you to learn, in contr&, that you could make money fromrandomly entering the market if your exits are good, if you practice good posi-tion sizing, and if you have the discipline ta fallow solid money-making rules.This newsletter will help you learn about the elements of success that are reallyimportant to making money in the market

Nine Money-Making Benefits You Will Get fromMarket Mastery:

1 Solid information on designing and testing yoursystem. You will get honest answers about what’simportant and what’s not, what works in the marketand what to avoid at all costs. We tell you what makesup a good system for making money in the market.When you know the truth, you’ll really have youreyes opened.

2 , Learn competent position sizing techniques. Po-sition sizing is the part of your business plan fortrad-in&he market that tells you “how much" you shouldrisk in any one trade or investment. The questian of“how much” should be a function of the equity inyour account. The concept of position sizing is asimple one. Yet, most investors ignore it and moreoften than not, pay a high price for ignoring it.

3 , You’ll learn about expectancy in detail. with-out a positive mathematical expectation, a trader orinvestor is destined to lose. If a negative expecta-tion method is continually used, eventually the trader/investor will lose all of their capital.

4. Information on how to approach the market as abusiness.

5. Book reviews and interviews that are hard to fmdin other newsletters.

6. Critical insight into recognizing emotional andpsychological traps that could sabotage your trad-ing, including a regular peak performance tip.

7 . Information about testing and tmding your sys-tem that is often overlooked by other publications.

8 . You’ll see systems designed while you watch.As we advance forward, we will demonstrate a modelfor assembling a complete trading system to helpyou profit more consistently in the market,

9 . Learn what to expect and how to maximize yourprofits. Market Mustery provides an expandedframework for evaluating market concepts and ideaswith a focus on objectives and honesty.

Market Mastery is published monthly. Yearly subscriptions are available as well as informative backissues. See the next page for a listing of back issue topics. A one year subscription is $240 per year.Special offer to new subscribers: $199 per year!

919-852-3994

Whether you are a seasoned professional or abeginner, you can increase your earnings, (andeliminate the stress), by completing and imple-menting Dr. Van Tharp’s home study program; thePeak Performance Course for investors andTraders.

Through the following books, you’ll discoverthe edge you need for consistent success in today’smarkets.

How to use RiskHow to Use Risk to Become a More SuccessfidInvestor, is packed with information and exercisesto help you succeed. You’ll learn about the losstrap-a dangerous snare many investors fall intoby simply doing what comes naturally. You’ll getspecific suggestions

ing systems in termsof providing information important to becominga successful trader.”

Chapters include: Commitment m How to UseThis Course * How to Duplicate Success * TheTasks of Top Trading . Understanding and UsingRisk l Psychological Elements of Risking. Tecb-niques to Objectively Measure Risk m Techniquesto Control Risk and Safely Manage Money

“A$er working with your course, I reordered myentire life. Zcan truly state that this turnaroundin my personal and professional lif is a directresult oftaking your course. “LA., California

How to Control Stress

Do you worry excessively? Are you overlystressed? Are you troubled by your health? Doyou sometimes feel out of control?

Haw to Control Stress to Become u MoreSuccessfit Investor, will help you perform moreeffectively as an investor while improving youroutlook on life. You will learn how the biologi-cal and Psychological components of stressaffect trading performance.

It will give you exercises and techniques formanaging stress that are designed to help you be-come a happier, more relaxed person and over-come stress-induced trading and investing losses.

Chapters include: Trading Stress * Self-As-sessment * Stress: Biological and PsychologicalPerspectives m An Information Processing Analy-sis of Trading * How Stress Produces TradingLosses l Get Out of the Fire l Wear Asbestos WhenYou’re in the Fire l Other Forms of Asbestos forWhen You’re in the Fire * Mental Control of theFire

rrmy trading was an emotional roller coasterAbout this time I discovered your course and en-rolled. Jcouldnot believe the d@erence in howIfelt when #ding. The anxiety level was gone,sleepless nights disappeared. I now lookedfor-wardto analyzing the market andmaking the nexttrude e~ortlessly. I’ TC., Washington

How to Control Losing Attitudes

Do you lack the patience to wait until you get asignal from your trading system? Do consecutivelosses cause you to abandon a winning system &lose your objectivity? Do you often invest or tradewhen you know that the odds are against you? Doyou fail to follow your system or have trouble tak-ing trades?

How to Control LosingAttitudes to Become aMore Successjd Investor, explores how your in-ternal perceptions and attitudes determine your in-vestment results. It includes exercises to assist youin understanding how ,to control your profits andlosses.

This volume is loaded with techniques to helpyou increase profits and minimize losses. It dis-cusses the structure of excellence-the character-

Continued....

919-852-3994

istics that typify the best investors--and showsyou how to make effective changes to improveyour performance.

It will help put you in touch with your values.Learn to eliminate conflicts and overcome weak-nesses to a&eve your goals and perform moreeffectively. You till lesrn to take quick action andavoid fighting the market.

Chapters include: Losing Attitudes l Under-standing Losses l Self-Assessment l How to UseYour Brain l The Structure of Excellence l Logi-cal Levels of Belief * A Ten-Step Plan for Invest-ment Excellence l Conflicting Values l Conflict-ing Internal Parts * Conflict: An Interview with aFloor Trader * Control Your Losing Attitudes

“. the course increased tny tradingprojtabili~,tripling itfrom what it once was... ” Td., Illinois

How to Develop DisciplineHow to Develop Discipline to Become u More Suc-cessful Investor,

when they trade.This volume gives you specific suggestions forcontiolling your mental state so that you can avoidfearful responses, remain calm and detached whileyou are trading; and wait patiently for the best op-portunities. Therefore, you can then avoid impa-tience and thus, overtrading.

The techniques in this volume can be put touse within minutes for an immediate impact onyour investing or trading.

Chapters include: What is a “State?” . Howto Observe and Select Your Mental State * How toGet the State of Mind You Want m How to Build aMental State from Parts * How to Regulate YourState l How to Control Your State of Mind m An

Analysis of Some Common States. Feelings as aBasis for Self-Sabotage . How to Deal with Com-pulsiveness * Steps to Discipline

“So far this year I am up over 100%. I believethat my study and application ofyour written ma-terial has been responsible for my turnaround. ‘ID. D., Canada

How to Make Sound DecisionsHow to Make SoundDecisions to Become A MoreSuccess&l Investor, contains successful decision-making strategies of some of the great traders whoare part of Dr. Tharp’s Successful Attitude ModelTM. Learn how they think. Learn how to imple-ment the strategies that successful traders haveused to make millions of dollars. This volume alsocontains a section on developing a winning gameplan that alone is worth the price oftbe course.

Chapters include: Mental Strategies versusTrading Systems l The Building Blocks * what isa Strategy? . Decision Elicitation l Other UsefulStrategies * Problems with Decision Strategies *Developing the Strategy You Want. Human Limi-tations and Probability Judgments. Common De-cision Biases * Hindsight Bias * Two ContrastingSuperTraders * On Intuition l Design a WinningGame Plan

“‘In addition to helping me develop the confidenceand other am’tudes crucial to success in trading, thecourse hasprovided tne the insight to quickly assessthe value of bmkers, research recommendations, andempioyrnent candidates Your claims am vali-duted by uctuul trading results ruther than simulatedor hypothetical truck records ” J FTT, Florida

The Peak Performunce Home Study course in-cludes these five books plus four audio tapes. Itsells for $595. See the order form, or call our of-fice for more information. Ask about our $49.95payment plan and bonus offers.

919-852-3994

Dr. Van K. Tharp’s Investment PsychologyInventory Profile Analysis

e Investment Psychology InventoryTM profle is a 176-item questionnaire

Tdesigned by world renowned trading coach Van K. Tharp, Ph.D. Over thepast 20 years, Dr. Tharp has conducted extensive research on how stress affects human performance.

Since 1982 he has specialized in the psychology of successful trading and investing. This unique profne willevaluate your areas ofstrcngths and weaknesses as an investor or trader. You can use the analysis and resultsfrom the profile to help guide you in your quest to improve your performance as an investor or trader.

The Investment Psychology Inventory Profile will rank your characteristics in three areas: 1) Psycho-logical Characteristics 2) Decision Making Skills and 3) Management and Discipline. The profilescores will give you insight into specific questions such as: does your personal life interfere with yourtrading success, does your attitude support trading activity, do you make decisions without worryingabout what others ‘are doing, are you disciplined and patient in your approach to the markets. Theseare only a few of the many areas analyzed in the profile.

Attached is a sample Investment Psychology Inventory Profile. This is only a sample and the resultsfrom this particular person are not intended to be a reflection of what your results may be. Eachprofile result is different, as each person that takes the test is different. Your results are kept in confi-dence and are never shared with anyone other than you.

The profile sells for $100.00, but if you purchase the Investment Psychology InventoryTM inconjunction with the Peak Performance Home Study Course your price is $75.

Please note: The profile no,longer includes a ten minute consultation with Dr. Tharp.

International Institute of Trading Mastery, Inc * 519 Keisler Dr., Suite 204, Cay, NC 27511

Phone 919-852-3994 * Fax 919-852-3942 - email: [email protected] l Web site: www.iitm.com

NatTIe:

Address:

City:

Phone: (-I--

0 My check is enclosed

Card Number:

Signature:

ST: _ Zip: Country:

Fax:( ) e-mail

Please charge my Cl MnstcrCnrd 0 V i s a 0 A m e x

Expiration Date:

The lnvcstment Psychology InvcntoryT~ profile disk contains both a MS-DOSTM version and a WindowsTM,version of the questionnaire. Inaddition, the profile manuel that accompanies the disk contains an sppcndix with a complctc listing of all the questions rind a place to fill inyour answers. Therefore, people who don’t have awes to a compaciblc computer can still complcrc the profile questionnaire.

IITM Product Order FormN a m e :Company:

Address:

city:

Country:

Phone:

Date of Order:

Method of Payment:CC Number:

Exp. Date:

Notes:

BKTOTFT

B K U N W T H

EKLOSMIL

BMRB

BK - Tricks of the Floor Trader

BK” Unlimited Wealth

BK _ What I Learned Losing a Million $‘s

BK _ When You’re Troubled (Slwan)BKWSA

BKWOWS

C O U R S E

BK - Winner Take All

BK Winning on Wall Street

C O U R S E

$30.00

$15.00

$595.00

UPREN INeed to contact us?

IIUPDATE ~st7swa1

I$240.00(

Subtotal 1

(919)852-3994 phone

(919)852-3942 fax

NC Residents Sales Tax (6%)

Ship pinginruily

Internet www.iitm.com

Email [email protected]

519 keisler dr., caiy, nc 27511 - bisnisfx yourself technique 2 - optimal f and the kelly criterion...

Documents